5 Important Things You Need To Know About Severance Agreements

Posted on December 22, 2014 by

For an employee, the possibility of being fired or laid off is a terrifying proposition. The loss of employment brings with it the stress of figuring out how to pay for all of the necessary expenses that we face in life, whether it is food, car payments, phone, utilities, insurance, rent or a mortgage. Some employees may be fortunate enough to be offered a severance agreement. Such an agreement may provide benefits that may relieve or minimize the stress of an employee’s unemployment. Listed below are five things that an employee needs to know about severance agreements that may impact whether he or she enters into a severance agreement.

1. What is a severance agreement?

A severance agreement is a contract entered into the employer and the employee. Under this type of contract, the employer will provide the employee with additional compensation in exchange for the employee’s promise to release any and all possible claims and not sue the employer. In order for the severance agreement to be legally valid, some additional compensation is required.

2. When will an employee be offered a severance agreement?

Certain employees – usually highly compensated ones – may be fortunate enough to have severance included in an employment contract at the beginning of employment or upon being promoted. However, usually severance agreements may be offered when an employer is terminating the employee’s employment, either by firing, resignation or lay off. It is important to note that employers are not required to offer severance to employees unless it already was a term of an employment contract or unless it would result in discrimination to offer it to some employees and not others. Employees may negotiate to terms of the severance agreement. However, technically any attempt to negotiate the severance agreement by making a “counter-offer” can act as a rejection of the severance agreement, in such an event an employer could withdraw the severance agreement. This is a danger of attempting to negotiate. However, most employers will continue to honor the original terms unless better terms are negotiated.

3. Do you have to sign a severance agreement?

An employee does not have to sign a severance agreement. Any evidence that an employee was coerced into signing a severance agreement may make that severance agreement legally invalid. However, if an employee wants to receive the additional compensation promised in the severance agreement, the employee must agree to the terms of and sign the severance agreement.

4. Will your severance payment be taxed?

Yes – severance is considered pay or wages and will be taxes. However, how it is taxed, depends on how the severance payment is paid to the employee. Employees may receive the severance payment in either a lump sum (all at once) or over a period of payments. If the employee receives the severance payment in a lump sum, the lump sum will be treated as a bonus, which means taxes may be withheld all at once on the lump amount. If the severance payment is paid as a salary continuation, received weekly, the severance payment will be taxed more like a weekly paycheck.

5. What is the deadline for you to sign a severance agreement?

If the employee is under age 40, then the Older Workers Benefit Protection Act amendments to the Age Discrimination in Employment Act (“ADEA”) do not apply and there is no minimum time frame. Accordingly an employee under 40 may only have a day or so to accept a severance agreement. If the employee is at least 40 years old and the employer is subject to the ADEA, then the employee must have at least 21 days to consider the severance agreement and 7 days to revoke in order to properly release any ADEA claim.

Seeking Legal Help

If you are contemplating whether or not to sign a severance agreement, you should contact an employment law attorney. The attorney will determine whether or not it is in your best interest to enter into the severance agreement and whether there are any grounds to negotiate a better severance.

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